Student Loan Discharge: Options to Cancel Your Federal Student Loans

 August 19, 2021
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Learning how to discharge student loans can be a game-changer for debt-burdened borrowers. While not everyone will qualify for student loan discharge, there are circumstances where the government will cancel your federal student loan balance.

In fact, there are a variety of options for student loan discharge (not counting the many student loan forgiveness programs for public service). Whether you’re interested in bankruptcy discharge or disability discharge of federal student loans, here’s what you need to know:

7 options for federal student loan discharge

If you meet any of these conditions, the government will cancel the remainder of your federal student loans. You’ll have to apply for student loan discharge and keep paying your loan until the right agency approves your application.

However, note that canceled loans may still count as taxable income. Even though you won’t have to pay back your student loans, you might have to pay taxes on the discharged balance. However, taxes have been waived on student loan cancellation until at least 2025 as part of the American Rescue Plan.

Here are seven options for making your student loans go away:

1. Closed school discharge
2. Discharge in bankruptcy
3. Discharge for total and permanent disability
4. Discharge for false certification or unauthorized payment
5. Student loan discharge for unpaid refund
6. Borrower defense discharge
7. Student loan discharge due to death

1. Closed school discharge

Federal student loans are for students at accredited colleges and universities. But if your school closes while you’re enrolled or shortly after you withdraw, you could qualify for student loan discharge.

More specifically, you must have been enrolled during or within 120 days of the school closing. If you withdraw more than 120 days after it closes, you won’t be eligible for student loan discharge.

If you find yourself in this situation, you’ll have the challenge of tracking down your academic and financial records. Because the college is defunct, try contacting the state licensing agency for your school.

Keep in touch with your loan servicer throughout the application process. If the agency approves your application, it will cancel 100% of your direct loans, Federal Family Education Loans (FFEL) or Perkins loans. It’s worth noting, however, that the Perkins loan program expired on Sept. 30.

2. Discharge in bankruptcy

Unlike other types of debt, the courts rarely discharge student loans through bankruptcy. But in extreme cases of “undue hardship,” declaring bankruptcy will wipe out some or all of your student debt. There’s no hard-and-fast rule for what constitutes undue hardship, but there are a few general guidelines:

  • You’ve made good faith efforts to pay back the loan.
  • If you had to pay back the loan, you couldn’t sustain a minimal standard of living.
  • Your financial hardship is going to continue for the foreseeable future.

If you’re considering filing for bankruptcy discharge, you must decide whether your situation falls under Chapter 7 or Chapter 13 bankruptcy. Chapter 7 filers have virtually no income to pay back any of their debts; Chapter 13 filers might be able to repay at least part of their debt if their loans were restructured to make them more manageable.

Since student debt is not typically included under bankruptcy filing, you may need to enlist a student loan lawyer. This legal process can be long and expensive, so you must consider whether filing for bankruptcy discharge is worth the battle. Consider all your options, including income-based repayment, before choosing student loan discharge through bankruptcy.

3. Discharge for total and permanent disability

If you’re facing a long-term disability that leaves you unable to work, you may qualify for Total and Permanent Disability Discharge (TPD). There are three ways you can qualify for TPD:

  • You’re a veteran with a service-related disability who can no longer work. You must submit documents from the U.S. Department of Veterans Affairs.
  • You receive Social Security Disability Insurance or Supplemental Security Income benefits. You must submit supporting documentation and have a disability review scheduled within the next five to seven years.
  • Your physician determines that you have a total and permanent disability that has lasted for at least 60 months and will last for at least another 60.

Whatever documentation you provide, it must show you’re unable to engage in gainful employment. As a result, you can’t pay back your student loans.

To apply for disability discharge, contact the loan servicer Nelnet. Nelnet will provide you with the information you need for your application and it will tell your loan servicers to pause collection for 120 days while it makes a determination on your case.

4. Discharge for false certification or unauthorized payment

This student loan discharge option applies primarily to direct loan or FFEL program loans. It’s offered to victims of identity theft or false certification. There are a few different ways to qualify:

  • Your school falsely certified you as eligible to receive loans even though you didn’t meet the requirements.
  • Your school signed your name on an application or promissory note without you knowing about it.
  • Someone took out a loan in your name (identity theft).
  • You trained for an occupation at school you can’t engage in due to a physical or mental condition, your age, a criminal record,or another qualifying reason.

If something suspicious happened with your student loans, you could qualify for this discharge option. Contact your loan servicer for more on how to prove false certification, unauthorized payment or identity theft.

5. Student loan discharge for unpaid refund

Like the false certification discharge, unpaid refund discharge applies to direct loans and FFEL program loans. It would come into play if your school didn’t pay a refund it owed to the U.S. Department of Education or a lender. In this case, the government will give you a partial discharge in the amount your school didn’t pay.

Qualifying for this refund may require a bit of detective work on your part. Contact your school to learn about its refund policies for federal aid, and ask your loan servicer for additional information.

6. Borrower defense discharge

Another way to qualify for student loan discharge is if your college violated state laws. Some schools, such as the for-profit chain Corinthian Colleges, have used illegal or deceptive tactics to convince students to take out loans and attend.

If you can prove a school defrauded you, you won’t have to pay back your student loans. You must prove the misleading conduct directly related to your loans or education. Documents like transcripts, enrollment agreements, emails with school officials, promotional materials and course catalogs may all be useful in supporting your claim.

Unless you request otherwise, the government will put your loans into forbearance or stop collections when you apply for a borrower defense discharge. If it approves your application, you won’t have to pay the loans back. But if it denies it, you’ll have to pay back the loans and the interest accrued while in forbearance.

7. Student loan discharge due to death

Federal student loans are also discharged if the borrower dies. In this event, a family member or representative must send a death certificate or other documentation to the loan servicer. All federal student loans are discharged. Parent PLUS loans are also canceled if the borrower or the student passes away.

Taxes on discharged student loans

Student loan discharge could save you thousands of dollars in debt and interest, but it doesn’t always reduce your student loan bill to zero.

When the government discharges your loans, the canceled balance might be treated as taxable income, as with Total and Permanent Disability Discharge. You might have to pay a certain percentage of your remaining balance in taxes.

This tax bill may be significantly less than what you’d pay in student loan debt. So prepare yourself for one last expense before you can say goodbye once and for all to your federal student loans.

Other student loan forgiveness and assistance options

While there are a number of options for student loan discharge, it’s still relatively rare for most borrowers. More common are student loan forgiveness and repayment assistance programs.

The government offers forgiveness programs, such as Public Service Loan Forgiveness and Teacher Loan Forgiveness. In exchange for several years of service, you could get the remainder of your loan balance forgiven.

States and universities also offer loan repayment assistance programs, which are typically based on occupation. They often benefit people who work in critical shortage or high-needs areas. Browse student loan repayment assistance programs by state or occupation to see if any apply to you.

Finally, you could also qualify for income-driven repayment plans if you’re struggling to keep up with student loan payments. These income-based plans extend your repayment plans and lower your monthly payments.

Adding years to your plan means you’ll pay more in interest in the long run. But it could be the solution you need to avoid defaulting on your student loans.

Reminder: Keep paying your loans until you’re approved

Remember that any application for student loan discharge or cancellation will take some time. You’ll need to track down and provide documentation to support your claim.

You’ll also have to wait for the associated agency to review your application and approve it. In the meantime, keep paying your student loans. If you pause payments and the government denies your application, you’ll have to deal with the fallout of ballooning interest.

Although these discharge programs are useful for some, there’s no guarantee you’ll qualify. Look into all avenues for managing your student loans. That way, you can take control of your debt and find the solution that works for you.

Interested in refinancing student loans?

Here are the top 9 lenders of 2021!
LenderVariable APREligible Degrees 
1.88% – 6.15%1Undergrad
& Graduate

Visit Splash

1.88% – 5.64%2Undergrad
& Graduate

Visit Earnest

2.50% – 6.85%3Undergrad
& Graduate

Visit CommonBond

1.89% – 5.90%4Undergrad
& Graduate

Visit Laurel Road

1.99% – 6.59%5Undergrad
& Graduate

Visit SoFi

1.88% – 5.64%6Undergrad
& Graduate

Visit NaviRefi

1.90% – 5.25%7Undergrad
& Graduate

Visit Lendkey

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

2.13% – 5.25%8Undergrad
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1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021.


2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Interest Rate Disclosure

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.48% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.

Auto Pay Discount Disclosure

You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.

Student Loan Refinancing Loan Cost Examples

These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.

One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.

© 2021 Earnest LLC. All rights reserved.


3 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.


4 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of April 29, 2021. Information and rates are subject to change without notice.
 


5 Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates from 2.49% APR to 6.94% APR (with autopay). Variable rates from 1.99% APR to 6.59% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.


6 Important Disclosures for Navient.

Navient Disclosures

1. NaviRefi loans are made by Earnest Operations LLC, a member of the Navient family of companies, subject to individual approval and underwriting criteria. California residents only: Loans made or arranged pursuant to a California Finance Lenders Law license. Additional terms and conditions apply.

– To qualify, you must be a U.S. citizen or non-citizen permanent resident of the United States, reside in a state we lend in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.navirefi.com/help-and-questions. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Loan terms are subject to eligibility. Approval and interest rate depend on the review of a complete application. Loan approval is subject to confirmation that your debt-to-income, free cash flow, credit history and application information meet the minimum requirements. You must have a minimum FICO score to be considered.

– You can choose between fixed and variable rates. Fixed interest rates are 2.75% – 6.04% APR (2.50% – 5.79% APR with Auto Pay discount). Starting variable interest rates are 2.13% – 5.89% APR (1.88% – 5.64% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.

– You can take advantage of the 0.25% Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. NaviRefi rate ranges are current as of June 1, 2021 and are subject to change based on market conditions and borrower eligibility.

– Loan cost examples: These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,250. Your actual repayment terms may vary.

– The information provided on this page is updated as of 06/1/2021. Earnest Operations LLC reserves the right to modify or discontinue (in whole or in part) this loan program and its associated services and benefits at any time without notice. Check www.navirefi.com for the most up-to-date information. Terms and Conditions apply. Call 855-284-4893 for more information on our student loan refinance product.

– Earnest Operations LLC – NMLS #1204917, CA CFL #6054788 – 535 Mission St., Suite 1663, San Francisco, CA 94105.
Navient Solutions, LLC – NMLS #212430 – 123 Justison St., Wilmington, DE 19801. Visit https://navirefi.com/lending-licenses for a full list of licensed states.


7 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.75% Fixed APR with AutoPay.


8 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.